It reminded me of the tech boom that collapsed in 2001-2002. People were raving about waterfont property on the Internet, only to discover that it didn't exist. Facebook is now undergoing an IPO frenzy, and the opening price suggests that they are capitalized at 100 times their trailing revenues. For any other stock, this valuation would be sheer fantasy. Surely that if something is too good to be true, it is.
With the unbridled optimism of Wall Street, they are charging ahead, forgetting that one piece of exploding Muslim-fanatic underwear on an airplane can turn unbridled Wall Street optimism into deep despair.
As I was listening to analyst Arvind Bhatia, I was struck by a couple of things. He was demonstrating a zeal for Facebook that seem to transcend the rational practicality of most stock pickers.
Let's look at some aspects of Facebook and its IPO. First of all, the smartest stock picker in the world, Warren Buffett is not participating. This tells you something.
Secondly, Facebook says that they have a billion users, yet all they can garner is $4 per user per year. Facebook has not yet figured out how to monetize its users, and specifically it has not figured out how to do so without violating their privacy. Google has.
Bhatia the analyst says that Facebook has a lot of personal information that can be used to direct advertising to. While this is true, a lot of that personal information is not that useful in getting monetized. For example Bhatia mentioned that Facebook knows what high school that I went to. After many years of graduating, our high school displays the entire spectrum of graduates who have go on to greatness, and others that have gone on to jail. There is no smooth curve of socio-economic demographics to glean out of that kind of information.
When doing a comparison of Facebook and Google, Google has the upper edge. First of all, they have an order of magnitude of intellectual capital compared to Facebook. Facebook has a bunch of php coding freaks brogrammers. Put plainly, Facebook isn't smart enough to take their info to the next level.
Google has the smartest guys on the planet developing algorithms. There is a huge difference between the two. It is the same reason why in spite of the fact that China makes all of our stuff, they will never overtake us in development and innovation. All of the intellectual capital resides in the free universities and companies in America that are unfettered by dogmatic rules when it comes to science and thinking. The profit motive is a very strong innovation driver, especially when it is coupled to a strong research base. Facebook doesn't have a strong research base like Google does.
There is another problem with marketing and Facebook. Many of the top bricks and mortar stores have closed their Facebook stores. Why ? Part of the reason is that the information on Facebook is too open. Facebook blasts out the fact that you play Bejewel or that you were looking at the adult diapers page on Facebook. I don't want all my Facebook friends to know that. I carefully screen the pics that I put up on Facebook to show that I haven't gained 20 pounds, yet if I am shopping at the "husky" page, my friends will know. Liking the Viagra page will tell my friends that there is trouble in sex department. Looking at the singles ads will let my wife's friends know that I am checking out the menu. I don't want my godson to know that I am turned on by lithe, exotic dark skinned beauties on the Victoria Secrets page.
Facebook crosses too many personal lines. And they don't know how to fence that. Whereas Google deals with pure algorithms, Bayesian inference and data mining. I am reminded of the Target customer that sent a teen some pregnancy coupons based on extensive data mining of the fact that young pregnant women buy some sort of skin cream coupled with a renewed interest in health and vitamins. They had detected the fact that she was pregnant before she told her parents. Google has this capability and Facebook, the way that it is configured, does not. And trying to change Facebook, will be like trying to put lipstick on a pig and taking it to market.
The biggest factor is that everyone is stating that Facebook has unmonetized potential. And they put a high valuation on that. My contention is that the valuation of the user base is way too high. There is a common misconception that every user base can be turned into a marketing base. That is simply not true. The older folks on Facebook just find it an easy way to keep up with people that normally they wouldn't make the effort to do so. But in no way, will they buy anything off Facebook. What the analysts fail to realize, is that many people want a social network just to be social and not to shop. The valuations of the user base are overly optimistic.
So while the emotions of Wall Street may inflate the price of Facebook, I am reminded of what goes up must come down. They don't have the strong basics that Google does of pure substantiveness in their model, and if they anger enough people, Facebook will overnight become another MySpace. Facebook is particularly vulnerable to someone coming along and making something better that doesn't violate my privacy the way Facebook does. You can't knock Google off that way without a billion dollars to do some research and develop some better technology. And when the Facebook collapse happens, we will all wonder why we never saw it coming.